In this episode of The Sound of Automation podcast, we sit down with Cara Walton, Director of Market Intelligence at Harbor Results, Inc.
Cara runs the company’s manufacturing intelligence tool - Harbour IQ. She is responsible for the strategic direction and growth as well as managing all data acquisition and intelligence gathering.
Bryan and Cara discuss the major trends and challenges impacting manufacturers. Listen in to learn what's going on in the manufacturing industry and how to overcome obstacles.
Transcript:
Cara Walton (00:00):
Something new and different and scary will always happen, and it will always impact businesses, right? There's always going to be the next thing, whether it be a recession, whether it be certain aspects, what we've see in our geopolitical environment today, there's always going to be something big and many cases impactful to manufacturers. Time and time again, we've seen that. At the end of the day, it comes back to how you're leading within your facility.
Podcast Intro/Outro Narrator (00:24):
Welcome to the Sound of Automation, brought to you by Wipfli, a top 20 advisory and accounting firm.
Bryan Powrozek (00:43):
Hello and welcome to the Sound of Automation. I'm Bryan Powrozek from Wipfli, and joining me today from Harbor Results is Cara Walton. Cara, how are you?
Cara Walton (00:53):
Hi, Bryan. I'm good. How are you?
Bryan Powrozek (00:54):
I'm doing well, doing well. So, we're here today to talk about something I know is near and dear to your heart, the manufacturing market, and just kind of get a general update on everything that's going on out there. I know there's a lot of forces acting in different ways that are creating a lot of uncertainty, a lot of questions for business owners. So hopefully you can probably not clarify at all, but at least give people something to think about and some ways to interpret what all they're seeing.
Cara Walton (01:21):
Yeah, I'll do my best. There's definitely, it's never a boring day in manufacturing, right? There's always something new to learn.
Bryan Powrozek (01:27):
Exactly, exactly. So, I guess before we jump into that, just would you mind giving everybody a little bit of your background and talk about the work that Harbor Results does?
Cara Walton (01:35):
Sure. So, my name's Cara Walton. As Bryan you said, I'm the director of Market Intelligence at Harbor Results. So, Harbor Results is a manufacturing consulting firm. We are based out of the Southfield, Michigan area, so right outside Detroit proper. And what we do day in and day out is we focus on helping North American manufacturers to small and medium sized, generally less than $500 million, improve their businesses. So, we do that through kind of two core ways, a lot of operations consulting. We do a lot of assessments, strategic planning, a lot of sales process to better understand kind of, hey, where are we going? Are we all marching in the right direction? Are our operations efficient? And that's what the consulting side of our organization does separately, the other side is kind of market intelligence where we call Harbor IQ. That's the side that I run, and that's where we collect all of the data and information.
(02:25):
So in a given year, we collect data from about 600 different manufacturers across many different process types. So, we'll look at die casters, plastics processors, people who are manufacturing automation equipment. We'll look at Stampers, we'll look at tool builders, contract machiners. We look at fasteners. We also look at chemical coders and powder coders. We look at a lot of different manufacturers at varying levels in the supply chain. So, what that allows us to do is collect all that data, understand kind of what's happening in all of their businesses, and then go from there in terms of what do you do with that? How do you gain insights in the data? And the other piece that we get to do on the Harbor IQ side of the business is we also get to look at the macro forces that impact manufacturers. So, there's always a lot of different headlines.
(03:11):
There's a lot of things happening in the marketplace at all times. So what we get to do is kind of say, okay, there's all this noise, there's all these different things, but how do they actually impact the day-to-day of what's happening within the four walls of someone who's trying to get trucks full and trying to get parts out or whatever the situation may be, depending on their process. So that's kind of what Harbor Results does. I've been with the company for six years now and had have had the pleasure of working in multiple different roles there, and I love getting to spend my days learning more about manufacturers. So excited to be here to talk about it.
Bryan Powrozek (03:43):
Yeah, no, thank you for that background. And I think that I hear that from a lot of the business owners I work with that they know there's so much data around them, whether it's external data on markets and trends and all this other stuff or their internal data, but they're just overwhelmed with, how do I make sense of this all? How do I take all of this production information and make it into something that I can use? And so that's kind of where you all step in and can offer some of that.
Cara Walton (04:14):
Yeah, exactly. Data is great, but what's even better than data is information. So sometimes you can have data and it's not information. So, our goal is to make sure that it's both right. It's data that gives you insights and information to run your businesses differently.
Bryan Powrozek (04:28):
Excellent. So, I guess let's use that as the jumping off point. So, what are some of the major trends that you're seeing impacting manufacturers as we kind of come to the close of 2023?
Cara Walton (04:43):
So I think there's a couple of different things that we're seeing impact manufacturers across the board. Some of it is industry specific. So, one of the big things that happened in the industry that just impacted a lot of manufacturers in the automotive side was the UAW and UNIFOR negotiation. So that was a big one. The good news there is that both the UNIFOR agreements and then the UAW agreements have either been ratified or expected to be ratified. So, after I believe a 46 day strike, those suppliers to the automotive industry for four GM and STIs should start to see improvements. But that was definitely a big one that I'll be honest with you, was concerning to a lot of manufacturers for an extended period of time there that are supplying to that marketplace. That's kind of the big quick hit one for automotive. But separately from that, there's a couple other big macro trends that we're seeing.
(05:32):
One of them is just overall kind of the economic picture. So, the biggest thing there, I could talk about the economy all day long. It's what I like to read about. But for manufacturers specifically, what they are impacted by consistently today is interest rates. We've got really high interest rates right now, and that impacts manufacturers in a couple of different ways. One of them is obviously it's a higher cost of doing business, so it's costing us more money to fund things if we have lines of credit. It may be more expensive if we're financing a new piece of machinery that's going to cost us more money if we're trying to automate something and we can't pay cash for it. All of those things are impacting us when we see higher interest rates. But the other thing that it's doing is it's impacting the employees of manufacturers. So not only are these economic trends and implications, if you will, impacting how you're running your business, but it's also impacting the pocketbook of all of your employees.
(06:26):
So that in many cases is also driving wage pressure. So, we've consistently seen a lot over the last two years, a lot of employees asking for higher wages. Our most recent survey that we did back in September, manufacturers told us that their largest concerns by far are just the overall higher cost of doing business, upward wage pressure, which is a big one right now as we chatted about. And then separately, they're also really concerned about things like continued inflation, the potential of recession, and then in general, access to labor. So not only is it can we pay our people the amount of money that they want to be paid, but also can we attract them and retain them in today's marketplace? There's a lot of challenges with the Amazon warehouse down the street might be paying a better signing bonus or might have better healthcare benefits than some of your manufacturers in certain cases. So sometimes it's really hard to find people both from a skilled labor perspective and from a general labor perspective. So that was a couple of different things, but those are some of the big things we're seeing right now that are impacting manufacturers.
Bryan Powrozek (07:23):
Oh yeah. I mean they're, it's a spider web, right? Exactly. They're all interrelated. And so yeah, if you think about the upward wage pressures, and so as an employee, yeah, I'm more incentivized to go to that Amazon warehouse now because they're paying more because I'm having to pay more for everything. So now, even if I like the company I work for, it's kind of outside of my control and I can't just make that decision. I'm going to stay because I like the people and the environment and the things I'm doing. You don't have the financial ability to just accept less. You've got to go where the money is.
Cara Walton (08:03):
Exactly. And especially when you look at wage. So, in many cases, we have seen manufacturers increase wages in the last two years, but they haven't increased them as much as inflation is increasing the cost of living. To that point, even if I love where I'm working and they've given me a wage increase and they're doing their best as an organization, if I still feel like at the end of the day I have left less money in my pocket to pay my bills and to take care of my family, it's a hard sell. And that's tough. At the end of the day, I know what we don't want to see as an organization, I'm sure you don't want to see is people leaving the manufacturing industry, but to the same avail. There are some other industries that sometimes have slightly cashier profit margins in some cases that can attract people and pay them a little bit more than your $50 million stamper down the street can.
Bryan Powrozek (08:47):
Yep. Yeah, and I know to your point about the wage, I mean from the employer side, there's only so far you can go and then it's just your business is no longer sustainable. So, I had a lot of clients who were looking at other type of incentives or benefit programs or things like that, like a key employee plan or an ESOP plan or something like that. But even those too, it's if somebody's going to see that added value on the backend versus cash in their pocket today, it's hard to pay your bills with the promise of future income. So, I'm happy to see business owners thinking about those things and trying to come up with other ways. But yeah, oftentimes, especially in the manufacturing environment, you're not going to be able to, I mean, an ESOP would cover all employees, but then depending on how big your employee base is, that's a little bit for everybody. And so, is that going to be enough to convince somebody to stay? So all of those things I think are great tools that a business owner needs to consider, but also has to realize there are going to be certain ones that are going to work better than others depending on the situation.
Cara Walton (10:01):
Absolutely. Yeah, because all those fringes, I mean, being an ESOP or having bonuses isn't really a fringe benefit. To your point, you're still getting money, but even some of the other fringe benefits, maybe you and the other people in your industrial park, if you're in an area with other manufacturers around, you are offering daycare that all of the different manufacturers go in on together and things like that. But to your point, at the end of the day, the challenge becomes all of these things, whatever they are, whether it be wage increases, other types of benefits, cost more money, and that's necessary in order to keep your people. So obviously I would advocate on behalf of taking care of your people, but vice versa. We're also sitting in a manufacturing industry right now that prices are being pressured in many industries and we're sitting with profits being pressured.
(10:43):
So it's not like you're looking at some massive corporation and saying, well, there's all this money to go around. Why aren't you giving it to your people? These are presidents and CEOs and business owners and leaders who are doing their best, but they're feeling pressure on the business side and pressure from their employees. So it's a little bit of a concerning squeezing point from our organization's perspective of you want to do your best by your people. Obviously, you want to take care of them and spend money, but vice versa, you've got bills to pay, you've got leases to pay for, you've got material to buy, you've got all these other challenges. And with a supply chain like we've had for the last three years and material price increases we've had, there's pressure, there's challenges.
Bryan Powrozek (11:19):
Well, and I like the way you mentioned that, the squeezing point, right? Because eventually at some point, and I kind of feel through the pandemic, that squeezing point was at the consumer. They had to pay wages with cost of living increases, things like that. I mean, that takes some time to catch up. So the squeezing point was at the individual level, the consumer level, and now it does seem like that is shifting more to the business level. So I guess what kind of information do you have about the financial health, so to speak, of those small to mid-sized manufacturers?
Cara Walton (11:57):
So honestly, it varies dramatically. So we're collecting data. The survey we did, so once a year we collect full financial data. So in June, July and August of this year, we collected 2022 calendar year financial data. So all of income statement and balance sheet information is what we collected during that point in time. What we saw in that data from approximately 300 different manufacturers who gave us that detailed level of financial information is some of them are doing really well, some of them are making a lot of money. Our top quartile data showed that their average profitability, so their earnings before interest in tax was 13.6%. So there were some manufacturers who were making a lot of money in 2022 and also doing really well operationally. We look at a metric that we call throughput or efficiency, and we term that as value add revenue per full-time per full-time equivalent, excuse me.
(12:48):
So what we do is we take total revenue and we take materials and subcontracting out of it because realistically those aren't processes that you're actually doing within your four walls. Either you're purchasing the material on the outside or you're subcontracting certain processes. You don't do them in house, you don't have the capacity, whatever the reason might be. And what we've seen in that throughput metric is that there are some manufacturers who are constantly improving that year over year and they're doing really well. But that's kind of the positive end. To pivot it to the negative part or what we're watching very closely is there's about 30% right now of the manufacturing base of that 300 chops that we just talked about that are sitting in a really challenging situation when it comes to how leveraged they are.
(13:29):
So we kind of classify businesses into three separate categories, and we do it by what their debt to earnings ratio is. So how leveraged their organization is compared to what their profitability is. And what we do is we say, okay, the people that have a low debt to earnings ratio and are really profitable, they're really bankable. They're people that a bank likes. They say, yeah, we'd love to lend you money, clearly going to pay it back with interest and it's going to make us more money. So there are a lot of companies that are sitting in that subset right now in 2022, that's about half of the total manufacturers that we surveyed are sitting in the bankable category. Now, if you go down from that, we also have somewhat bankable. So these are guys who aren't doing too well, but not too poorly. So depending on your bank and depending on other aspects of your financial situation, they may be really willing to lend you money or help you.
(14:14):
Our concern right now is this what we're calling questionably bankable categories. So that's that group that I referred to specifically, it's 29% of manufacturers that we surveyed are sitting in this questionably bankable category. That's concerning for us for two reasons. Number one, especially when you think about those in automotive who just had to shut down for six weeks as you're ramping back up from a shutdown, in many cases you need money to make money, so you need some type of a line of credit or borrowing in some capacity to buy the materials to ramp back up if you've been down or on a shortened schedule for so many weeks. So it's concerning us when we think about how some of these businesses will ramp back up or continue to do well separately, what's concerning is we saw that number go from 19%. So about 19% of our manufacturers were questionably bankable in 2021, up to that 29% number in 2022.
(15:04):
So we're seeing more businesses fall into this highly leveraged not making a lot of money category. And part of the reason for that is because they ran out of money in some cases from things like PPP funding, CEWS funding. If you're sitting in Canada, a lot of ERC credits were out there for a period of time. I think some of those are still going on, but there was a lot of money coming into manufacturers that wasn't coming from what I'm going to call traditional means of making money. It was still money or a low interest loan depending on the situation. But that money has dried up. So a lot of these businesses got a lot of money for a year or two years during the early stages of covid, whether that be 2020 or 2021, those that additional income has dried up. And now they're sitting in a situation where in some cases they didn't focus on process improvement for the last three years. They didn't really focus on maybe cutting their headcount when they needed to, and some of them are in a challenging predicament today. Now, in fairness, it's the minority. So I don't want to make that say that everybody's in a bad situation. There are many manufacturers doing quite well as I started with, but we're watching this 30% that's in the questioning bankable category quite closely.
Bryan Powrozek (16:12):
And even for those businesses in the next layer up and the next layer, it's a good time. As you said, they miss the opportunity to do those process improvements, things like that. It just takes a couple of these dominoes falling in succession to move you down into the questionably bankable. So take this opportunity now and say there's enough noise on the horizon that 24 is not going to be great, could be good, could be bad, but we know it's not going to be a banner here. So let's try and start doing some of those things now and put ourselves in a better cash position, free up a little more cash so we can ride out those valleys and be ready to, because as with any economic cycle, I feel the businesses that are ready to jump just before the trough and really start going after it are the ones that make the most upside as it goes up to the next peak. So never a better time than now to start looking into that and working on it.
Cara Walton (17:23):
I couldn't agree more. I think the way that our organization is kind of terming it lately is the runway is getting shorter. So to your point, there's always peaks and valleys, right? We're always going to go up and down and we've heard manufacturers say at time and time again, this is a good year. That was a bad year. It's okay, we're going to work through it, right? And they're right and we appreciate that and there's always peaks and valleys, but our concern is that that runway to get better again, to your point, to focus on that process improvement to free some cash is getting shorter every time because of all these things coming at us. So previously maybe we had six months, eight months to kind of turn things around. Now we might have three weeks depending on the business and all of these outside forces.
(18:03):
To your point, if too many dominoes fall the right way, it could be concerning. So that's kind of why if you will, kind of banging this drum of look at your financials closely. Two of the core things that I would harp on for us, one of them is running 13 week cash flows. We still walk into manufacturers today that don't do that. That scares me in today's marketplace. To your point with not only economic cycles, but depending on what industry you're in, you always have increases and decreases in sourcing. It comes when you think about how much you have to pay your employees, all of these things, if you're not running through team meet cash flows. I would start separately from that. The other big thing that we're watching is what's happening with value add revenue versus top line revenue. One of the challenges that we saw happen with a lot of manufacturers over the last three years is our top line revenue kept growing.
(18:53):
So as an organization we were like, oh, we went from being 25 million to 30 million. We're growing. This is great. And then generally speaking, when we say, Hey, we're growing, this is great, we need to hire more people. So we saw a lot of manufacturers who said, oh my gosh, we're growing. We hired more people, but we're not making any more money. Why is that? And the answer in some cases was purely because despite their revenue going up, they weren't actually doing more within their facility. It was purely what I'm going to call not true increases in revenue due to material content. So we saw some businesses who had maybe 30, 35% material content depending on if you're stamping, molding, bending, whatever you're doing, going to have more like 42, 40 3% material content as a percentage of their total revenue. And what that was doing is maybe we were growing $5 million in top line revenue year over year, but our value add revenue, what we were actually doing within our facility was flat or even lower.
(19:47):
So then ultimately we just increased our breakeven point because we hired more people, but simultaneously we didn't actually increase our value add revenue. So the other thing I would harp on beyond 13 week cash flows is if manufacturers haven't already look at your value add revenue, understand how that's ebbing and flowing year over year as hopefully, and maybe I'm not right about this, but hopefully we're seeing some balances in material pricing again. So now that we're starting to get level set again from the wildness over the last 24 months, how can you better understand what kind this new normal of material prices in some cases is impacting the value add revenue in your business?
Bryan Powrozek (20:23):
It's funny, as you were starting that response, my head was going to cashflow Because I've seen that in so many businesses where when the pandemic hit the number of clients I helped get a 13, 13 week cashflow up and running. It was kind of astounding. And then we even had the conversation at the time of like, Hey, this isn't just a tool for when things get bad. You can keep doing this and make it part of your DNA that this is just something you look at. Because even when things are good, can I take on that additional order? Well, I have the cash to be able to fund what I need to buy to support that order. I don't know. Let's go to the cashflow and see how it's going to play out.
Cara Walton (21:06):
Absolutely. And in fairness, 13 week cash flows are way more fun when you're running them for those reasons in terms of whether or not I can take on the new order than when you're running them for whether or not I can pay my bills. So to your point, do it in both instances, but you'll be far more pleasant when you're doing them for the first reason.
Bryan Powrozek (21:24):
And you're already kind of in the conversation here, you've switched back and forth a little bit. Let's maybe move into some things that manufacturers can do to capitalize or mitigate some of these risks depending on which end they tend to be on. So based on some of these trends, we've talked about wage pressures here, we've talked about your debt to earnings ratios and some of those things. What are things business owners can do to survive this next part of the cycle?
Cara Walton (21:53):
Yeah, I'd say there's a lot of different avenues that you can take. The biggest one that I'd say right away is use your own data. So we go into a lot of businesses today where rightfully so we're talking about strategic planning or kind of what should we do in the future? And the first question always becomes, okay, what have we done before? How has our own data looked? How did we do from a profitability perspective by customer? How did we do by press? If we're sitting somewhere where we have presses in our facility, what did that look like for each individual sku? How do we do with lower volume work versus higher volume work? Just kind of a lot of different questions to better understand what does your own data show you about your business, first off, because there may be some really interesting nuggets as we started the conversation with right now it might just be data and ERP system, but maybe it can become information that helps you plan differently and make different business decisions.
(22:44):
So that'd always be my first comment is use your own data separately from that. And it's not a selfish plug, but maybe it is a little bit use external market intelligence, whether that be Harbor results does that through Harbor IQ, but there are a lot of outside market intelligence providers out there. They're market intelligence providers for a reason their day-to-day job is to watch what's happening in the marketplace and a manufacturer's day-to-day job is to run an efficient facility. So utilize those resources, whether it be through benchmarking data, through market studies, through other types of industry research. Have those outside providers help you. To your point, when you have the cash to do so, don't overextend yourself, which is why my first comment was using your internal data, but when you feel like you have some of that additional funds to be able to spend that money, a lot of those outside resources can really help you do something differently.
(23:33):
So that's kind of my first harp on the data piece specifically. I am a data nerd through and through, so I can't never talk about data beyond that. The other thing that we'd recommend, and we talked about this a lot with frankly originally during covid and then again during some of the strike impact, oftentimes when businesses are slow, we get into this mindset of our hair's on fire because we're slow, right? So we're so concerned, and obviously it's important to be concerned. There's a lot happening and you be running these 13 week cash flows as we talked about. But the other opportunity there is when things are a little bit slower, if you're choosing to keep your people in many cases for all the right reasons, right? It's skilled labor. You have the financial capability to do so. Whatever the situation is, do those continuous improvement projects, walk your floor, look at things that need to happen.
(24:20):
If you've got two guys that are coming into work and they're kind of sitting idle because two of your machines are down for whatever reason, can they go clean up that material loading area over there that hasn't looked good in two years? And every time the president walks on the floor, they say, man, we should really do something about that and then never do. Can now be the time that you do those continuous improvement efforts to improve efficiency in your shop floor. Those are a couple of the things that I would say. The biggest thing that we see, and we actually did a lot of analysis for this on our recent study, is to your point and to the initial part of this conversation, something new and different and scary will always happen, and it will always impact businesses, right? There's always going to be the next thing, whether it be a recession, whether it be certain aspects, what we see in our geopolitical environment today, there's always going to be something big and many cases impactful to manufacturers.
(25:09):
Time and time again, we've seen that at the end of the day, it comes back to how you're leading within your facility. There's always going to be these things that are outside your control. So how are leaders leading in their own businesses? And what we saw in our data is we do a lot of assessments. So we look at all key areas of the business, we look at everything from leadership and financial performance to operations, material management, all of that. And what we've seen every single time is that those companies who score better overall as an organization, meaning all nine key functional areas are doing well, they have the highest scores in leadership. So what that tells us is that every single time we walk into one of those facilities that's doing really well, it's because there are leaders at the top of that organization that are encouraging people to control what they can control, be aware of the noise and the outside factors, but don't let it impact what I'm doing today in my business and to continue to be better and do something different every day.
(26:04):
And I'd lobby that leadership isn't just the president or CEO, that's a big part of it. Obviously they lead to the helm, but then it's how are you trickling that mentality and that leadership down into everyone that's reporting to someone else or not? Maybe your maintenance guy is a single shingle that just reports up to your director of ops or whatever it may be. How can he lead differently or she, how can they do a better job of leading in the industry to say, here's how we do more preventative maintenance. Here's how I help you guys who are running presses identify things ahead of time. I don't know what it is. It always depends, but at the end of the day, for us, it's always boiled back down to those leadership characteristics, how they do better.
Bryan Powrozek (26:45):
And it's interesting. I feel like that goes back to a couple of the points you made, but even if we look at the 13 week cashflow or I like the comments you made about putting, if you do have a slowdown, putting people to work doing things that, I was just at a client this morning that he mentioned that, that while they weren't significantly impacted by the strike, they were a little slower. So this was the time they got all those little things done that they've been meaning to do and just never had the time to do. And so keeping your people employed, keeps them engaged, keeps them from worrying about their job that if something's going to happen, and that comes from the top in leading people and setting that establishment because anybody can do a 13 week cashflow when the life of your business depends on it. You're being able to make payroll, depends on it, but it's when times are good that the leadership needs to be there to say, Nope, that's still important. We got to keep doing that. So no, I think that that is, all these things tend to really boil down to leadership and the message being sent by those running the organization.
Cara Walton (27:55):
Yeah, absolutely. And it's tough, right? I know I'm a part of, it's a young leadership forum, so it's young and up and coming leaders in the industry and we talk about it a lot and I've heard many presidents and CEOs talk about it too when we're in meetings with them. It's lonely to be that person sometimes to be that leader that's always pushing, to your point, that discipline and those ongoing things that we have to do differently. But our organization would lobby time and time again that it makes a difference. And there are outside, obviously there are other leaders probably sitting in similar C-suite roles that you can talk to that also understand the loneliness that comes with it. But nonetheless, it's important because you're driving that discipline in your organization and you're driving it to be better every single day than it was the day before in any marketplace. But especially in today's marketplace, when the runway is getting shorter, when we have all these macroeconomic forces at play and customers that have very high expectations of all of their suppliers, you got to do it and it makes a difference.
Bryan Powrozek (28:57):
Excellent. Well, Cara, this was a great conversation. I appreciate you making some time to come on. If anybody wants to reach out and learn more about Harbor results or yourself, what's the best way to get ahold of you?
Cara Walton (29:09):
Yeah, absolutely. Thank you for the time. I appreciate it. Probably two main avenues. One of them, you can go to our website, www.harborresults.com, and there's ways to reach out to us on there through a couple of different kind of pinging avenues. You can go in and put in your contact info if you're interested in anything separately from that. I would encourage anyone to reach out to me on LinkedIn, Carol Walton with AC. I'm assuming that'll be in some type of writeup on the podcast, but it's CARA, not with AK. Please connect with me on LinkedIn and I'd be happy to chat with you further and better understand anything that's going on.
Bryan Powrozek (29:41):
Great. Well, thanks again for the time and appreciate you coming on.
Podcast Intro/Outro Narrator (29:44):
Thank you for tuning in. Don't forget to like us subscribe and share on social. To learn more about Wipfli, visit us at Wipfli.com. That's W-I-P-F-L-I.com. Perspective changes everything.
